Oil markets can spend all morning arguing about how many barrels Organization of Petroleum Exporting Countries (OPEC+) plan to produce.
A pipeline company has a slightly different concern. Who actually needs something moved? Production targets don’t automatically become physical barrels. Wells need to operate, customers need to buy and the product still needs transportation, processing and storage. That creates a different way to invest in energy without placing the entire bet on tomorrow’s oil price.
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Follow the contract
Producers generally make money from commodity prices. Midstream businesses can earn fees for transporting, processing, or storing those commodities.
Some customers reserve capacity under longer-term contracts, providing more predictable cash flow even when energy prices bounce around. Predictable isn’t guaranteed, however. After all, contracts expire, customers can struggle and certain revenue remains volume-sensitive.
Even so, it’s a useful distinction for Pembina Pipeline (TSX: PPL). Pembina operates pipelines, processing plants, fractionation, storage and export infrastructure across Western Canada. And those keep active no matter what’s going on in the markets, pretty much.
Test the dividend first
Before you dive in, it’s important to see how the company’s doing when it comes to its balance sheet. Second-quarter adjusted cash flow from operating activities reached $1.34 per share. Pembina’s quarterly dividend is also at $0.74.
That means the payment consumed roughly 55% of that adjusted operating-cash-flow measure. Importantly, adjusted operating cash flow isn’t free cash left after every project and maintenance requirement is met. Pipelines remain capital-intensive businesses.
That’s why I’d pair the payout calculation with actual project returns. Pembina’s pipeline adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell to $626 million from $646 million in Q2, even as aggregate volumes increased. Meanwhile, facilities adjusted EBITDA rose to $386 million from $331 million.
Looking ahead
A change in Alliance Pipeline tolling contributed to the pipeline decline. That provided a useful reminder for investors. Moving more product doesn’t automatically mean making more money. Contracts and pricing still decide what each barrel is worth to the infrastructure owner.
That said, Pembina targets 5% to 7% compound annual growth in fee-based adjusted EBITDA per share through 2030. If delivered, that could support both the current dividend and future increases. At $66.14, the $2.94 annualized dividend yields about 4.4%. That makes Pembina appealing among Canadian dividend stocks.
There are other points to consider. Project delays, higher borrowing costs, lower customer production and unfavourable contract changes can all hurt returns. Pembina also has some commodity-sensitive activities, so it isn’t entirely insulated from energy prices. A position inside a Tax-Free Savings Account (TFSA) can make the income more tax-efficient, but contracts still need customers capable of paying them.
Bottom line
Investors don’t need to correctly predict every OPEC+ meeting to own energy infrastructure. Pembina already earns from moving, processing and storing production that exists today. Its 4.4% yield also appears reasonably covered by current adjusted operating cash flow.
I’d watch per-share EBITDA growth and completed projects more closely than another production headline. The barrel still needs somewhere to go, regardless of what OPEC+ promised at the meeting.
